PROFESSOR MARRION, SPRING 2012
I. UCC & UFTA: Debtors’ & Creditors’ Rights outside Bankruptcy
A. Secured Transactions
a. Security Interest prevails over those without (whether or not its perfected)
b. Perfected is better than unperfected (even if unperfected is first in time
c. Lien creditor beats unperfected security interest
2. Judgment lien, IRS lien (non-consensual)
3. Between perfected security interestsàfirst in time is first in right
a. Purchase money security interest
b. Has priority over earlier perfected security interest
c. Is this incentive for the bank to lend money so they don’t come in line after the company selling the product?
5. Requirements for creating security interest under UCC 9-203
a. Security agreement or possession/control of collateral
b. Secured party must give value (not necessarily new value) to debtor
c. Debtor must have rights in the collateral
a. File financing statement
b. Possession (if cash, must possess)
c. Controlàcreated by granting the secured party a three-party control agreement (bank account), where 3rd party won’t release any money into the account.
a. Pre-judgment Remedies
i. Attachment (seizure of debtor’s property—actual or constructive)
(a) Serves as a means of security over property
(a) 3 party proceeding (P going after 3rd party who owes/has D’s money or assets)
(i) No money (owed/had)
(ii) Right of set-off
(iii) Cannot be applied to wages
iii. Lis Pendens
(a) Notice of a pending legal action (affecting real property)
(a) Similar to Civil Procedure
(a) Almost same process as pre-judgment garnishment, except now it’s an enforcement mechanism
(b) Can be applied to wages (subject to very strict protections)
iii. Judgment Lien
(a) Fairly passiveàwait until the judgment debtor wants to do something with the property
(i) Unless you want foreclose
(ii) Subject to statute of limitations (with possibility of renewal or revival)
(iii)Subject to a state-set judgment rate of interest
(a) Most brutal of post-judgment remedies
(b) Seizing and selling property/asset almost immediately (upon obtaining writ of execution)
(c) Performed by “indifferent 3rd person” (state sheriff/marshal)
(d) Execution lien is issued to the judgment creditor (gives priority over other creditors)
1. Allow for debtors to retain a minimum amount of property
2. General types of statutes
a. Homestead, car, wedding ring
b. Combined asset and amount (homestead, up to $75,000)
c. Dollar amounts (any property up to $10,000)
3. Typical types of exempt property
b. Tools of trade
4. Prevent only non-consensual liens
5. Granting a security interest in exempt asset is okay
6. Waiving exemption not allowed (as against public policy)
7. Equity greater than exemption will not prevent sale of the exempt property
a. Only available to humans (not corporations)
C. Fraudulent Transfer Law
1. Modern law focuses on 5 types of transfers—UFTA § 4
a. Actual Intent to Hinder, Delay, or Defraud
i. Can be avoided by present and future creditors. UFT § 4(a)(1)
b. Transfer in question is for less than reasonably equivalent value, at a time when the debtor is rendered insolvent
i. Can only be avoided by present creditors § 5(a)
c. Transfer in question is for less than reasonably equivalent value, when the debtor is undercapitalized
i. Can be avoided by present and future creditors. UFT § 4(a)(2)(i)
d. Transfer in question is for less than reasonably equivalent value, intended to incur, or believed, or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.
i. Can be avoided by present and future creditors. UFT § 4(a)(2)(ii)
e. Insider preference § 5(b)
i. If insider has reasonable cause to believe debtor is insolvent, and the debtor is insolventàvoidable insider transfer.
ii. 1 year statute of limitations (4 years on all others—#s 1-4)
iii. Can only be avoided by present creditors
iv. “insider”= definition § 1(7)
(a) See this often when shareholders pay themselves first, when there’s not enough to go around
2. Insolvency Tests § 2
a. Balance Sheet: sum of debtor’s debts are greater than all of the assets
b. Equity Test: debtor not paying his debts as they become due if notà rebuttable presumption that debtor is insolvent
3. Defenses to Fraudulent Transfer § 8
a. Transferee took in good faith and for reasonably equivalent value
i. TransferoràInitial TransfereeàImmediate TransfereeàMediate Transferee
b. Defenses available to “subsequent transferees”ànever available to initial transferee
i. Good faith and gave value
c. Remedy (more than defense)
i. Entitled to a lien on the property for the value given (made whole)
4. Examples of Commonly Challenged Fraudulent Transfers
a. Giftsànot for equivalent value
b. Gamblingàgetting equivalent value in entertainment
c. Gifts to qualified charitable organizationàunder Code, this is protected
i. Under UFTA, no reasonably equivalent valueànot protected.
5. Bay Plastics
a. Elements of Constructive Fraudulent Transfer
i. Made transfer or incurred obligation
ii. Without receiving reasonably equivalent value
iii. Rendered debtor insolvent
iv. Was attacked by a pre-transaction creditor
II. General Bankruptcy Provisions:
A. Jurisdiction & Venue:
1. Venue is proper:
a. Where the debtor is domiciled
b. Residence, ppb, principal assets, had been located for 180 days immediately prior, or the place they were domicil
ii. If filed in bad faith, the court may award punitive damages.
4. If the court grants the petition, the case proceeds as if it were a voluntary filing.
a. A debtor who is involuntarily placed in Ch. 7 has an absolute right to convert to a Ch. 11, unless the case has previously been converted from another chapter. § 706(a).
b. The trustee may avoid any transfers taking place 90 days prior to filing the involuntary petition. § 547.
c. Involuntary Gap Creditors
i. Involuntary gap (the period between filing and order for relief) creditors receive priority status behind administrative claims, but before other priority claims.
D. Automatic Stay § 362
1. Extent of the Stay
a. A creditor may not: § 362(a)(1) – (8).
i. Take any action against the debtor or the property of the estate.
(a) E.g., suits for payment, letters requesting payment, refusing to perform services due to the debtor unless the debtor pays.
b. A creditor may:
i. Communicate with the debtor, including send an accounting that says “this is not a bill.”
ii. Accept unsolicited payment.
iii. Take action against non-estate property – post-petition wages, guarantors or co-debtors.
iv. Evict a non-residential tenant after expiration of the lease. § 362(b)(10).
v. Setoff is not permitted, but an administrative freeze is permitted.
(a) Lifting the freeze is procedurally identical to lifting the stay or obtaining use of cash collateral.
(b) Bank may exercise rights of setoff after a lift-stay, unless: § 553
(i) The claim is disallowed;
(ii) The claim was purchased by the bank post-petition, or within 90 days pre-petition while the debtor was insolvent; or
(iii) The debt was incurred within 90 days of petition, while the debtor was insolvent, for the purpose of obtaining a right of setoff.
(c) The setoff is avoidable by the trustee: § 553(b).
(i) To the extent that the setoff amount improves the bank’s position by decreasing the deficiency that existed 90 days pre-petition.
(ii) The trustee may also avoid any setoff within 90 days pre-petition that improves the bank’s position.
(d) For purposes of setoff, the debtor is presumed insolvent 90 days prior to filing. § 553(c).
(i) The stay continues until discharge or dismissal. § 362(c).
(e) Transactions entered into with the intent to create a right of setoff are avoidable. § 553(a)(3).